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TITLE 26-INTERNAL REVENUE CODE (2) Transferability of property The rights of a person in property are transferable only if the rights in such proper- ty of any transferee are not subject to a sub- stantial risk of forfeiture. (d) Certain restrictions which will never lapse (1) Valuation In the case of property subject to a restric- tion which by its terms will never lapse, and which allows the transferee to sell such prop- erty only at a price determined under a for- mula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value. (2) Cancellation If, in the case of property subject to a re- striction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes- (A) that such cancellation was not com- pensatory, and (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evi- denced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the re- strictions) at the time of cancellation over the sum of-- (C) the fair market value of such property (computed by taking the restriction into ac- count) immediately before the cancellation, and (D) the amount, if any, paid for the can- cellation, shall be treated as compensation for the tax- able year in which such cancellation occurs. (e) Applicability of section This section shall not apply to- (1) a transaction to which section 421 ap- plies, (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2), (3) the transfer of an option without a read- lly ascertainable fair market value, or (4) the transfer of property pursuant to the exercise of an option with a readily ascertain- able fair market value at the date of grant. () Holding period In determining the period for which the tax- payer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. (g) Certain exchanges If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such ex- change was pursuant to the exercise of a con- version privilege- (1) such exchange shall be disregarded for purposes of subsection (a), and (2) the property received shall be treated as property to which subsection (a) applies. (h) Deduction by employer In the case of a transfer of property to which this section applies or a cancellation of a re- striction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the ser- vices in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such ser- vices. (i) Transition rules This section shall apply to property trans- ferred after June 30, 1969, except that this sec- tion shall not apply to property transferred- (1) pursuant to a binding written contract entered into bc~ore April 22, 1969, (2) upon the exercise of an option granted before April 22, 1969, (3) before May 1, 1970, pursuant to a writ- ten plan adopted and approved before July 1, 1969, (4) before January 1, 1973, upon the exer- cise of an option granted pursuant to a bind- ing written contract entered into before April 22, 1969, between a corporation and the trans- feror requiring the transferor to grant op- tions to employees of such corporation (or a subsidiary of such corporation) to purchase a determinable number of shares of stock of such corporation, but only if the transferee was an employee of such corporation (or a subsidiary of such corporation) on or before April 22, 1969, or (5) in exchange for (or pursuant to the ex- ercise of a conversion privilege contained in) property transferred before July 1, 1969, or for property to which this section does not apply (by reason of paragraphs (1), (2), (3), or (4)), if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, or if gain or loss is not other- wise required to be recognized upon the exer- cise of such conversion privilege, and if the property received in such exchange is subject to restrictions and conditions substantially similar to those to which the property given In such exchange was subject. (Added Pub. L. 91-172, title III, §321(a), Dec. 30, 1969, 83 Stat. 588, and amended Pub. L. 94- 455, title XIX, §§ 1901(a)(15), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1765, 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(15), struck out "(or. if later, 30 days after the date of the enactment of the Tax Reform Act of 1969)" following "after the date of such transfer", and § 1906(b)(13)(A), Page 108